NAB changes interest rate forecasts for 2013

RBA now expected to cut by 75 points to 2¼% as economy struggles. With the economy continuing to weaken and unemployment set to rise noticeably through 2013 the RBA will need to cut significantly further than previously expected in 2013.

With the economy continuing to weaken and unemployment set to rise noticeably through 2013 the RBA will need to cut significantly further than previously expected in 2013.

We have reviewed our GDP forecasts and currently see 2013 at around 2% (2½% previously) with unemployment rising to around 5¾% by late 2013. That would see, on a no policy change basis, a budget deficit in the $10-15bn range for 2012/13.

We still expect GDP growth of 2.8% for 2013/14 and a touch above 3% in 2014 helped by new rate cuts. However that implies a larger output gap and unemployment remaining elevated (around 5 ¾ – 6%) with the Government fiscal position near balance.

The weaker activity outlook will also help contain inflation to below 3% even including the carbon tax impact. Nor do we see the AUD offering much relief to a struggling economy.

We have put the first cut in Q1 – where the Q4 CPI outcome in late January will be important as to exact timing. Thereafter we expect the RBA to wait to see the impact of recent policy moves but will need to react further by mid year. We have tentatively put further cuts in May and August.

We now expect a terminal cash rate of 2¼% in the September quarter of this year.

We continue to expect the Australian dollar to track gradually lower during 2013, as the combination of continuing RBA rate cuts and a firmer US dollar weigh on the currency. Nonetheless our forecast of around parity in late 2013 still represents a strong currency.